India bank selloff exposes a trust deficit

IDFC First Bank

25/02/2026 12:00

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Shritama Bose

MUMBAI, Feb 25 (Reuters Breakingviews) - Confidence in India’s financial sector is always provisional. The latest reminder comes from IDFC First Bank IDFB.NS, whose shares have struggled to rebound after plunging 16% on Monday, when the $7 billion lender flagged a suspected fraud involving Haryana state government accounts. The selloff looks excessive. But the bank’s inconsistent earnings record since its enlargement from a 2018 merger between IDFC Bank and Capital First – a non-bank lender once favoured by foreign investors – helps explain why the market is reluctant to give management the benefit of the doubt.

The institution, backed by Warburg Pincus with a 10% stake and Abu Dhabi Investment Authority with 5%, is investigating the episode, which involves old-school cheque deception and amounts to 5.9 billion rupees ($65 million). Chief executive V. Vaidyanathan has describedit as “a specific isolated incident” confined to a single branch. The bank has suspended employees and ordered a forensic audit.

IDFC has moved quickly to contain the damage. It has paid out the full amount claimed by Haryana after Nayab Singh Saini, the state's chief minister, accused the bank of delaying action on the fraud. The hit more than wipes out earnings for the three months to December 2025 and equals about 38% of full‑year profit. Yet IDFC's blunt response should reduce the risk of other states following Haryana in cutting ties with the lender; government deposits account for roughly 10% of its funding base.

Vaidyanathan, founder of Capital First—the lender Warburg Pincus originally backed—has steered the enlarged bank well. He has built a low‑cost liability franchise that now accounts for 52% of total deposits, the highest share among mid‑sized private banks. Its tier‑1 equity capital ratio of 14% is also comfortably above the 9% regulatory minimum.

Yet despite net profit having trebled over the past four financial years, earnings have been uneven. Microcredit problems cut profit by 48% in the year to March 2025, while provisions for stressed infrastructure loans dragged on results in earlier years. Investors scarred by years of misreporting by Indian banks will sell on any sign of weakness.

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CONTEXT NEWS

IDFC First Bank delayed addressing suspected fraudulent activity in government accounts, Nayab Singh Saini, Chief Minister of the northern state of Haryana said on February 23. A day later the bank said it has paid the state its entire claim of a net 5.83 billion rupees ($64 million).

The private bank on February 21 said it was investigating a suspected fraud of nearly 6 billion rupees by some employees involving accounts of local government entities and that the bank had alerted the police.

Shares in IDFC First fell 16% to 70.04 rupees on February 23 and have since recovered just 1%.

IDFC First's earnings are improving but remain inconsistent https://www.reuters.com/graphics/BRV-BRV/zgpolwxrnvd/chart.png

(Editing by Una Galani; Production by Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on BOSE/shritama.bose@thomsonreuters.com))